Firms Cater to Young Investors Wanting to Sync Investments With Values

Each generation brings its own demographic weight to bear, reshaping markets along the way. Take baby boomers, for example, who have been changing what retirement looks like and how wealth management firms serve their needs. Now their millennial children are making their first mark on the investment world as they increasingly seek to align their investments with their values.

Of course, using money to do social good is not new. A century ago, Andrew Carnegie spoke of a gospel of wealth and spent lavishly on philanthropic enterprises, building thousands of libraries, for instance. But todays youngest investors want to go a step further, and are expressing a stronger interest than their parents and grandparents in using investments as a tool to do so.

Millennials are a key part of this, and were just coming into the period of time over the next two decades where they will express their values through their investment decisions, says Jamie Rantanen, director and client advisor at Deutsche Asset & Wealth Management.

More than 60% of high-net-worth investors say making a social impact using money, time or expertise is extremely or very important, according to the World Wealth Report 2014 by RBC Wealth Management and consulting firm Capgemini, which surveyed more than 4,500 investors in 23 countries.

But when it comes to leveraging investments to make a social impact, attitudes differ widely between generations. About 75% of investors under age 40 rate socially minded investing as very important. That figure drops to 45% for investors age 60 or older.

According to a U.S. Trust study, 75% of millennial high-net-worth investors take into account the social and environmental impact of companies in which they consider investing. Almost 80% of millennials feel strongly that socially motivated investors can hold public companies accountable for their actions and results, according to the study, which surveyed 680 investors with $3 million or more in investable assets.

Interest in aligning values with investments is snowballing, says Patricia Farrar-Rivas, CEO of Veris Wealth Partners, a San Francisco-based RIA that specializes in sustainable and impact investing: Weve seen an explosion of this in the past five years, and its accelerating.

Building Bridges

Wealth management firms are positioning themselves to service this rising generation of young investors. While individual investment strategies may differ, with many preferring a so-called environmental, social and governance approach (ESG), they all result in a closer alignment of clients investments with their values. Farrar-Rivas says shes seen more firms develop these types of offerings to their clients since she helped found Veris in 2007.

As of May, Bank of Americas investing businesses, which include Merrill Lynch and U.S. Trust, have more than $7 billion in assets under management that use an ESG approach. Merrill has about 100 ESG-themed third-party offerings on its platform.

That activity has not only increased in scope, in terms of products, but also in terms of services that advisors can use to engage their clients, and specifically millennials, around the things that interest them, says Christopher Wolfe, CIO of Merrill Lynchs Private Banking and Investment Group and chairman of the firms ESG Council.

He says Merrill is looking to directly engage with millennials on this front and has established advisory boards across the firm: We have to think about how we respond to that demand. U.S. Trust offers what it calls a Socially Innovative Investing Portfolio that includes six strategies, ranging from a focus on womens and girls equality to environmental sustainability. U.S. Trust clients can also have custom portfolios created that enable them to better align their investments with their values.

Were not looking at this as you have to give up returns to meet with your values. We believe that when done thoughtfully and done with an eye toward your portfolio, these are viable strategies, says Jackie VanderBrug, investment strategist at U.S. Trust. She adds, What were finding is that there is a huge appetite for people who say that all things being equal, Id much rather invest according to my values.

VanderBrug attributes millennials rising interest in this kind of investing to the influence that events and consumer trends of the past decade have had on them.

Deutsches Rantanen says that awareness has grown in part because of these issues, but also because of the maturity of funds and broader access for investors. We and other firms are doing a much better job creating awareness, as well as beginning to develop actual products and distribution so that more investors can access them, he says.

The firm created a platform that has sustainable investments geared toward environmental issues and energy consumption. And last year, Deutsche created an office that internally screens investments based on ESG criteria.

Gaining Access to Young Clients

For advisors across the industry, and by extension their firms, its also a way to build bridges to younger investors, many of whom are likely to inherit their baby boomer parents wealth.

What we have noticed in younger clients is that they ask more questions [all] around: Is this a good company? Does it have good corporate governance? Theyll ask those questions before they ask about whether its a good investment, says Nataleah Dietzmann, senior vice president and director of marketing at regional firm D.A. Davidson.

By answering those questions, advisors have an opportunity to have deeper conversations and understand what motivates their clients, she says: That enables a stronger relationship and a better partnership than simply asking, Hows my returns?

David Fisher, a Wheaton, Ill.-based advisor at Benjamin F. Edwards, has worked with millennial clients to structure portfolios to better match their values. Fisher says the extra effort is worthwhile because its a good method of connecting with a client. One couple asked him to avoid investments related to the tobacco industry because a family member had died of lung cancer.

I think [clients] feel really good when youve listened to them and taken the proper steps in their portfolio, he says.

Fisher adds that the questions about returns and performance often come up. But he and others in the industry say that adding a values component to the investing process doesnt have to be a drag on returns. In fact, experts partly attribute the rising interest in values-based investing to the success of funds specializing in that type of investment approach.

Advisors and executives also say that while the phenomenon is growing in importance, its still part of the personalization of the investment process that they strive for with all clients.

As far as work and follow-through, I think that customization based on anything is part of the normal workload that advisors have when they are working with clients, particularly at the higher end, says Merrills Wolfe. Youre always customizing parts of the investment process for the client.

Big Expectations

Millennials, often defined as those born between 1980 and 1999, are just beginning to make their impact on investing  but it could be huge. There are more than 80 million Americans between the ages of 15 and 35, according to U.S. Census data. Theyre at the beginning of their professional lives and have many years to accumulate assets. Moreover, many will inherit their baby boomer parents wealth. Advisors and executives note that, among the wealthy, millennials are becoming more involved in family meetings and more engaged in the process of managing the family fortune.

We are anticipating enormous growth, whereas before it was about establishing this landscape and how do we bring people into this landscape, says Veriss Farrar-Rivas.

Deutsches Rantanen notes that the industry is being proactive in its efforts to help these young investors align their investments with their values. Its necessary, he argues, to be in sync with this generation, which will receive an unprecedented transfer of wealth: Firms like ours and others are making concerted efforts that will cater directly to the values that millennial investors hold deepest, and how they will invest their money now and in the future.